RBI rate hike: How higher rates will impact your EMIs, FDs and debt funds

Summary

For borrowers, this would mean higher interest rates on home, vehicle and personal loans, while savers could benefit from better returns on fixed deposits.

The Reserve Bank of India (RBI) increased the repo rate by 25 basis points (1 basis point or bps is equal to 0.01%) to 5.50% on Wednesday, its first hike since February 2023. The hike was a result of accelerating inflation and geopolitical uncertainty that has pushed up crude oil prices.

More importantly, the Monetary Policy Committee shifted its stance from ‘neutral’ to ‘calibrated tightening.’ Indranil Pan, chief economist at Yes Bank, said ‘calibrated tightening’ indicates another hike or a pause. Economists peg the hike at anywhere from 25 bps to 100 bps cumulatively in the current fiscal year.

For borrowers, this would mean higher interest rates on home, vehicle and personal loans, while savers could benefit from better returns on fixed deposits (FDs) and bonds.

Impact on borrowers

Floating-rate home loans linked to the repo rate will be directly affected, impacting both existing and new borrowers. Lenders have started increasing rates on new loans, particularly with the festive season approaching. As of Thursday, Punjab National Bank, Bank of Baroda, Bank of India and Indian Bank, among others, had increased their repo-linked benchmark lending rate (RBLR) by 25 bps.

“I expect the increase to be passed on immediately for new customers. State Bank of India will announce its quarterly rate changes by 15 October and other major banks are likely to follow,” said Mangesh Zope, founder of Peaceful-Loans.

For existing borrowers, the transmission can vary across lenders, depending on the reset terms.

“SBI’s loan agreement says rates linked to the EBLR (external benchmark linked rate) reset on the 15th of every month, while ICICI Bank resets rates once a quarter. NBFCs could pass on the increase faster as it’s a rate hike,” said Zope.

Once the higher interest rate takes effect, lenders typically extend loan tenures and keep EMIs unchanged. This doesn’t mean the EMI can’t be increased—borrowers have to ask the lender to revise the EMI.

“A 25-bps hike’s impact will not be significant. At 7.5% over 25 years, the monthly EMI could rise by about ₹490 on a ₹30 lakh loan, ₹654 on ₹40 lakh and ₹817 on ₹50 lakh,” said Adhil Shetty, CEO of BankBazaar.

But with another hike or a pause likely, borrowers should keep an eye on the loan tenure, Shetty added.

“Many lenders extend the tenure to keep the EMI unchanged, which feels easier but costs more over time,” he said.

A longer tenure results in higher interest outgo. Take the example of a ₹50 lakh loan at 7.75% with a 20-year tenure. If the rate rises to 8% and the EMI is unchanged, the tenure will increase by eleven months, and the borrower would pay about ₹3 lakh in additional interest than if the EMI was increased and the original tenure was retained. Keeping the tenure unchanged will increase the monthly EMI by about ₹775.

Stretched repayment